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SEC eyes deferred annuity riders

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The Securities and Exchange is telling insurance companies that it is taking a hard look at disclosures insurers are making to customers contemplating purchase of deferred annuity riders, a new option when purchasing variable annuities.

Also coming under “heightened” scrutiny are funds and contract names that suggest safety or protection from loss. 

The SEC views on these issues were made at a recent ALI-CLE meeting held in Washington by Norm Champ, SEC director of the Division of Investment Management.

“The staff has recently heightened its scrutiny of fund and contract names suggesting safety or protection from loss,” Champ said.

“We have concluded that the terms ‘protected’, ‘guaranteed’, and similar terms, when used without some additional qualification, may contribute to investor misunderstanding about the potential for loss associated with an investment,” Champ said.

He noted that the agency recently published a Guidance Update (2013 – 12) that explains these concerns.

As a result, in the disclosure review process, the staff recently requested that some funds and contracts change their names,” Champ said. “The staff took this action in response to an increase in the use of the term ‘protected’ in situations where that term was used without a qualification that would adequately describe the nature and limits of any protection offered,” Champ said. 

Champ made his comments at an ALI CLE Conference on Life Insurance Company Products. His comments were posted on the SEC website.

“It is important that disclosure statements to customers regarding deferred annuity riders make clear to investors that the amounts transferred out of variable subaccounts to purchase these deferred income payments are no longer available to the contract owner, other than through the receipt of the deferred, fixed income payments,” Champ said.

Lee Covington, senior vice president and general counsel at the Insured Retirement Institute, says Champ’s comments are important.

In IRI’s view, Covington said, Champ in his statement was trying to tell industry officials what should be in the disclosure statements for deferred annuities, based on some of the filings they have reviewed that have been provided them by issuers. “Champ is basically seeking to tell issuers what will be acceptable in these disclosures and what will not be acceptable,” Covington said. He said the SEC keeps a list of guidance they have provided to issuers when examining their filings, in hopes that will be helpful to other issuers. 

This ensures that the filing process goes forward more smoothly, Covington said. Effectively, companies will also try to be responsive to staff comments in their filings. He also said it is “helpful” when the SEC staff provides feedbacks on their experience in reviewing.

“We are always appreciative of the staff providing expectations of what they expect in filings,” Covington said.

In his statement at the ALI-CLE meeting, Champ said the SEC wants those disclosures because “this loss of liquidity is an important factor for investors to consider when determining whether to transfer amounts out of the variable portion of the contract,” and should be clearly disclosed to investors in offering statements,” he said.

Champ said that another important factor for investors to consider is the exposure to the insurer’s credit risk that accompanies a transfer into the general account. 

“Further, an investor who is shopping for a deferred, fixed annuity may have many options available outside the existing variable annuity contract, and there may be better annuity rates available elsewhere, under a separate contract with either the same or another insurer,” Champ said.

“When the staff reviews variable annuity contracts with this new feature, we are looking for effective disclosure addressing these and any other factors that are material to investors,” he said.

Deferred annuity riders are riders under variable annuity contracts that permit withdrawals from the variable portion of the contract to purchase deferred, fixed income payments under the same contract.

They offer investors the ability to build a stream of future annuity payments over time rather than making a single, lump sum purchase payment at the end of the deferral period for annuity payments that begin immediately, Champ said.

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